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A crossroad for CG reforms in Korea

by Stephanie Lin, Research Head, Korea and Singapore

23 December 2024

On 14 December, President Yoon Suk Yeol was impeached following political turmoil over his controversial declaration of martial law earlier in the month. Prime Minister Han Duck-so is now serving as acting president. With the opposition Democratic Party controlling the National Assembly, what are CG reform prospects in Korea with these developments? 

Since President Yoon took office in 2022, his efforts to improve corporate governance in Korea have produced mixed results. This is largely due to his dual approach of trying to balance the interests of chaebols and the growing retail investor base, which now accounts for one-third of the voting population. Compounding the challenge, President Yoon’s People’s Power Party has been unable to secure a majority in the National Assembly, preventing him from fulfilling his campaign promise to introduce a compromised version of the mandatory takeover bid rule, which remains stalled in the legislature. 

The Corporate Value-up Program (CVP), launched earlier this year by the Yoon administration, initially generated high expectations within the investment community. However, its voluntary nature has led to increasing scepticism. When the Value-up Index was announced in September, it faced criticism for its stock selection criteria, further eroding investor confidence. To date, the CVP remains a voluntary initiative, with no significant tax incentives—widely seen as critical to its success—being implemented. 

Despite its shortcomings, the CVP, along with the growing general investor base, has raised attention on corporate governance issues in Korea. With increased public awareness, shareholders including retail investors are now seen exercising their rights more actively, which has prompted regulators to monitor more closely and address capital market transactions that may disadvantage minority shareholders. Several local asset managers and investors we discussed with describe the corporate governance reform momentum as an "irreversible tide." 

The “Boost-up Project” 

Following its victory in the April general election, the Democratic Party announced its corporate governance reform initiative, the "Boost-up Project," focusing on amendments to the Commercial Code. On 19 November, the party submitted a bill proposing six key changes: 

1. Extending directors' duty of loyalty to include all shareholders, not just the company. (Article 382-3)

2. Prohibiting the exclusion of cumulative voting for listed companies with assets above KRW 2 trillion (approximately USD 1.4 billion). (Article 542-7)

3. Requiring the separate election process for audit committee members to increase from one to two. (Article 542-11(1)) 

4. Renaming "outside directors" as "independent directors." (Article 635)

5. Allowing electronic shareholder meetings in parallel with physical meetings. (Hybrid AGMs, added clause: Article 542-15) 

6. Increasing the minimum ratio of independent directors for firms with assets below KRW 2 trillion (approximately USD 1.4 billion) from one-fourth to one-third. (Article 542-8)

ACGA views these proposals as positive steps aligned with long-standing advocacy objectives:

Renaming and increasing Independent Directors: Renaming “Outside Directors” as “Independent Directors” is a better reflection of their roles and responsibilities. Increasing the number of independent directors could enhance their influence and improve management oversight. However, it is equally important to ensure these directors have practical business and industry experience to be able to challenge management and meaningfully enhance board oversight. 

AGMs and Cumulative Voting: ACGA supports hybrid AGMs, which allow remote participation with real-time voting, speaking and Q&A, while maintaining a physical location for in-person interaction with management and the board. Fully virtual AGMs pose risks such as technical challenges, selective question handling and reduced transparency, hence in our view should only be permitted in exceptional situations, for instance during a pandemic. Meanwhile, cumulative voting, as we highlighted in our recent report "Navigating the AGM Maze in Korea," remains essential for minority shareholders in Korea to amplify their voice on governance matters. 

Audit Committee elections: As noted in ACGA’s "CG Watch 2023 Korea" report, the 2020 amendment to the 3% rule, which requires a separate election for one audit committee member during director elections, has effectively allowed minority shareholders to be able to select a director who would represent an independent check on management. Extending this requirement to two audit committee members could further strengthen board accountability and independence.

Amendment to clarify directors’ duty of loyalty 

A key proposal in the Democratic Party’s bill is to amend the Commercial Code to extend directors' duty of loyalty to all shareholders rather than limiting it solely to the company. As noted in our earlier blog, ACGA views this amendment as a positive step toward addressing conflicts of interest in capital transactions, such as issuing new securities, treasury shares, or mergers and acquisitions (M&A), where the interests of controlling and minority shareholders may diverge. Expanding directors' duty of loyalty to include all shareholders could potentially influence directors' behaviour by holding them legally accountable to shareholders, thereby incentivizing them to prevent transactions that could harm minority shareholders' rights.

In response to this proposal, the current ruling party has instead suggested amending the Financial Investment Services and Capital Markets Act (FSCMA) to address issues related to corporate transactions such as mergers, spin-offs, a comprehensive exchange or transfer of stocks, and business transfers. Note that the proposed amendment to the Commercial Code initially appeared to have bipartisan support, the ruling party shifted its stance apparently following strong opposition from the business community. The proposed amendments to the FSCMA aim to remove the current method of determining merger ratios based on stock prices, a controversial aspect highlighted in Doosan Corporation's recent restructuring. Instead, the merger value will be determined by considering stock prices, asset value and income-based value to ensure fair pricing. Additionally, the amendments require listed companies' boards to prepare statements detailing the merger's purpose, expected effects, price, ratio terms and to obtain and disclose external assessment of proposed M&A terms. 

These amendments represent progress in addressing transparency and fairness in M&A transactions. However, while the changes to the FSCMA are a step forward, they do not substitute the need for amending the Commercial Code. The Capital Markets Act’s scope is limited and does not encompass all types of transactions that may harm minority shareholders. In contrast, the Commercial Code offers overarching principles to guide independent directors’ decisions across various capital transactions.

Amending the Commercial Code is a necessary step in shaping directors’ behaviour and ensuring that minority shareholders’ interests are considered across a broader range of transactions and various potential scenarios, including corporate restructurings and M&A. Carrying through both reforms – the Capital Markets Act as well as the Commercial Code – would provide a more comprehensive framework to protect minority shareholders effectively and raise governance standards in Korea.

What next?

The Constitutional Court is currently reviewing the impeachment motion against President Yoon, a process that could take up to 180 days to reach a final judgment. Depending on the outcome, either a continuation of Yoon’s presidency or a shift in political leadership will shape the trajectory of CG reform in Korea. 

Yoon’s three-year term has seen limited progress on CG reform, partly due to legislative gridlock between the executive and the National Assembly. A more coordinated relationship between the two branches would pave the way for more convincing CG reforms. Initiatives such as the opposition’s "Boost-Up Project," which includes measures ranging from cumulative voting to enhanced director duties, may gain momentum if there is a political transition. Additionally, a new administration might revisit or revise the Value-up Program to align policy priorities, and possibly break the deadlock on corporate governance reform. Exciting times! 

Please also see the public letter that ACGA has sent to the National Assembly of Korea. 

 

About the Author(s)


Stephanie Lin
Research Head, Korea and Singapore, ACGA

Stephanie Lin
 joined ACGA in October 2021  to support ACGA’s ongoing research into corporate governance and ESG development in 12 markets across Asia-Pacific, with a special focus on Korea, Singapore and the Philippines. Previously, Stephanie worked in the consulting and financial industry for five years. As a business consultant, Stephanie advised multinational investment and corporate clients on regulatory, legal and reputational risks. 

Stephanie was born in China and grew up in California, US. She holds a Bachelor of Arts in Political Science and a Master of Arts in International Relations from New York University.

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